Theme 3: Government Intervention Flashcards
How do governments control monopolies?
- Price regulation- through preventing monopolies charging excessive prices this might result in a loss of allocatively efficiency.
- Profit regulation- Through high corporation tax on any profits this encourages investment.
- Quality standards- Regulators can observe the quality of the goods and services of the firm.
- Performance targets- This ensures a minimum target is being met to regulate quality. This improves social welfare.
How does the deregulation and privatisation promote competition and contestability?
It makes a market more competitive, which should improve economic efficiency.
Deregulation reduces government power and enhances competition.
Excessive regulation can limit the quantity of output that a firm produces. This might limit the size that a firm chooses, or is able, to grow to.
Free market economists would argue his gives firms the incentive to operate efficiently and provide the goods consumers want.
How does competitive tendering for government contracts improve competition and contestability?
The government could contract out this provision, so that private firms operate things such as roads or hospitals.
The firm which offers the lowest price and best quality of provision wins the
government contract. This saves the government money, since the public sector can be bureaucratic and inefficient. The private sector has an incentive to reduce their costs, since they operate in a competitive market.
How does Restrictions on monopsony power of firms protect suppliers and employees?
Many farmers lose profits due to the power monopolies have, as the monopolies can negotiate a better price.
Governments can regulate this to ensure that farmers are receiving a fair deal. They can do this through grants and subsidies.
The CMA might investigate to check monopsony’s are not abusing their buying power.
How does nationalisation protect suppliers and employees?
Nationalising an industry creates a natural monopoly. Often because is inefficient to have more than one. eg water and water pipes.
Some nationalised industries have very strong positive externalities.
Nationalised industries have different objectives to privatised industries, which are mainly profit driven. Social welfare might be a priority of a nationalised industry.
Draw a diagram explaining where nationalised and privatised firms operate
Privatised firms operate at Q1 P1, which is the profit maximising level of output and price. A nationalised firm is more likely to operate at Q2 P2, which is the allocatively efficient level of output (AR=MC).
What is the impact of government intervention on prices?
- Governments prevent monopolies charging excessive prices= might result in a loss of allocative efficiency.
- Make essential services more affordable= Benefit those on low or fixed incomes.
- Limiting how much a firm can increase its prices by= encourages the firm to become more efficient. So can lower their costs and increase their profit margins.
- High corporation tax= firms might pass on the extra cost onto consumers, resulting in higher prices.
What is the impact of government intervention on profit?
- Strict price caps= limited investment as profit is restricted.
Draw a diagram to illustrate the likely impact of government intervention on efficiency and explain?
Private sector firms are more likely to operate at Q1 P1, which is the profit maximising level of output and price.
A public sector firm is more likely to operate at Q2 P2, which is the allocatively efficient level of output (AR=MC).
Therefore, government intervention might lead to an increase in economic efficiency, since the objectives change from profit maximisation to maximising social efficiency.
Why might the private sector be more efficient than the public sector?
- Operating in a competitive environment, firms have an incentive to become more efficient
- As they are forced to lower their average costs to profit maximise.
- Private sector also have to produce the goods and services that consumers want to keep earning profits.
- This might increase allocative efficiency.
What is the impact of government intervention on quality?
- Ensures firms are focusing on increasing social welfare by ensuring they meet minimum targets.
What impact does government intervention have on choice?
- If governments regulate monopolies and encourage startups and growth consumer choice widens.
- A price ceiling might force some supplies out which reduces the quantity and choice.
- If governments can reduce the price of a good or service, which could allow those on low or fixed incomes to access goods and services they previously couldn’t afford.
Why is regulatory capture a limit to government intervention?
When regulators start acting in the interest of the company rather than the consumer.
Why is asymmetric information a limit to government intervention?
Its hard for governments to decide what price to put a price cap.
Its hard to decide what a cost to society is in a market with market failure as it might be different between each person.
Without sufficient information governments could make poor decisions and lead to a waste of resources.
